STRENGTHS

Retention of "one country, two systems" principle, considering the complementarity of the two economies

Good business climate

WEAKNESSES

Economy vulnerable to slowdown in Chinese activity and world trade

Industry completely delocalised to Mainland China

Growing competition from Mainland China in services sector

Highly exposed to property sector

Rising inequalities in the territory

Lack of transparency of financial data

Risk assessment

Activity is expected to slow in 2016

Despite the Chinese economic slowdown, Hong Kong's growth proved resilient in 2015, because of robust domestic demand. In 2016, activity is expected to deteriorate because of the erosion of consumer confidence against a background a falling property prices. Value of property assets should continue to suffer from downward pressure that will affect domestic demand. The government has announced the building of several homes. Nevertheless the steps taken to contain the property bubble will be progressively relaxed. Besides, uncertainties regarding US Federal Reserve’s monetary policy weigh on activity as any hike would be passed on by the Hong Kong monetary authority because of the Hong Kong dollar's peg to the US dollar. Household consumption will continue to be the main driver of activity, but is expected to slow despite employment holding firm, lower inflation and wages rising. Moreover, investment is likely to stall, with the contraction in property prices and liquidity putting pressure on the construction sector.

In 2016, exports of goods and services (200% of GDP) will continue to suffer from the Chinese slowdown. The sectors linked to tourism, such as retail sales, will be most affected. Tourists from Mainland China, who represent 75% of visitors, are expected to continue to curb their spending. The anti-corruption policy introduced in Mainland China has hit sales of luxury goods and the entry quotas put in place by the Island have prompted some Chinese tourists to visit other destinations. Moreover, activity at the port of Hong Kong, which acts as a trade hub for Mainland China, is also likely to be affected while it suffers from increasing competition from Mainland China’s ports.

Finally growth in financial services is expected to remain dynamic, with the Hong Kong Stock Exchange as the second largest financial centre in Asia in terms of capitalisation and the Island is an entry point for capital from Asia. Nevertheless, it will be hit by increased competition from neighbouring centres.

Robust financial system

Hong Kong's public finances will remain solid: in 2016, the country is expected to continue to post a significant budget surplus and public debt will remain almost zero. Nonetheless, the moderation in property prices will affect the public accounts by reducing the income generated by sales of land. Meanwhile, the current account surplus is like to continue to be significant, because of the moderation in imports. In this context, foreign exchange reserves will remain satisfactory (almost 8 months of imports).

Meanwhile, even if the property bubble bursts, the banks should remain sound because of the limits imposed on household debt and the regular stress tests conducted by the supervisory authorities.

The offshore yuan market for non-residents introduced by the Chinese authorities remained dynamic during the first half of 2016. This market is accompanied by an offshore yuan bond market, called the Dim Sum Bond market, making Hong Kong the world's financial centre for the xeno-yuan, just as London became the financial centre for eurodollars in the 1960s, when controls were placed on outflows of bank capital in the United States. Moreover, the Hong Kong-Shanghai Stock Connect investment channel, launched in November 2014, has established a connection between the Hong Kong and Shanghai Stock Exchanges. Subject to keeping within certain quotas, the Island's investors can thus trade securities listed in Shanghai and vice versa. A similar project with the Shenzhen Stock Exchange has been approved and should be launched during the second semester 2016.

Status quo on the electoral law

In August 2014, the National People's Congress put forward new rules on the election of the Chief Executive in 2017. Although the rules allow for direct universal suffrage, the pro-democracy activists see the proposal as a backward step, since candidates authorised to stand are required to be approved in advance by a committee made up of 1,200 members, most of whom belong to the Chinese Communist Party. The pro-democracy activists, who will thus no longer be able to nominate a candidate, have launched major protests, The movement, labelled the "Umbrella Revolution", because of the umbrellas used by the demonstrators to protect themselves against the tear gas used by the police, occupied Hong Kong's streets between late September and early December 2014 demanding that Leung Chun-ying, the Chief Executive, step down and calling for "genuine democracy". In early 2015, the situation stabilised gradually and in June the Legislative Council rejected the reform proposal by a large majority. The electoral law is, therefore, likely to remain unchanged until the 2017 elections. Nonetheless, the ruling party won the most seats in the November 2015 local elections.